Enjoy benefits of scale with a larger super fund

KEY POINTS

Figures published by the prudential regulator support the oft-made argument – by the federal government, the author of the Cooper report on retirement funds and the Australian Prudential Regulation Authority itself – that when it comes to superannuation, size matters.

Savers looking at the data might like to check the size of their fund; likewise, smaller retirement schemes might look to review their strategy.

As of June 2011, APRA found 20 super funds with assets of more than $10 billion (excluding state government-controlled schemes).

Members of those large funds accounted for 55 per cent of all members, but the key was they accounted for a disproportionate amount of assets.

The 55 per cent of members who were in big funds held 62 per cent of all super assets in the pooled sector.

Conversely, members of funds with less than $1 billion under management accounted for 14 per cent of all members but only 4 per cent of total assets. Members of funds overseeing between $2 billion and $5 billion of assets accounted for 11 per cent of members and 16 per cent of assets.

Of course, there may be a variety of reasons to explain the distribution of assets.

It is possible that members of large funds have higher incomes and so are able to contribute more.

That said, there is no reason why this should be the case and it is not difficult to think of large funds where members are not particularly well paid. REST and HESTA spring to mind. Presumably, part of the answer lies in the ability of larger superannuation funds to deliver consistently superior returns at a lower cost.

“The reality is that scale does have an impact on our business,” said Anthony Badwell-Ball, chief executive of NGS Super, which last week announced it is to merge with UCSuper, a deal that will create a $4.4 billion fund with more than 100,000 members.

Mr Badwell-Ball argued that funds with fewer than 10,000 or 20,000 members would struggle to offer good services and optimal returns.

“You get a real advantage when you are managing $5 billion to $10 billion,” he said.

The NGS Super chief, who will remain in the top job after the merger, said he expected to be able to freeze administration fees for the next three years as a result of the merger.

NGS Super’s total fee to members is about 1.1 per cent, including a $1.25 weekly accounting fee and a 0.1 per cent administration fee, which is capped at $500 a year.

“From a member’s perspective, there is a lot of evidence to say that small funds are more expensive than large funds,” said Warren Chant, director of research firm Chant West.

“You can see why funds with less than $1 billion of assets should be tidied up. Clearly they are not getting the benefits of scale,” Mr Chant said.

APRA’s own statistics should come in useful when, once it has obtained new supervisory powers, it starts to conduct annual fund checks.

From July 2013, funds will need to satisfy APRA every year that they have sufficient scale to be able to offer no-frills default products, known as MySuper.

Some experts argue that large funds can suffer from diseconomies of scale because it becomes harder for them to outperform the general market.

Still, in the seven years to June 2010, of the 20 best-performing industry schemes, only four had assets of less than $2 billion, a Chant West survey found.

That would suggest, at the very least, a correlation between size and consistency.

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